Why the Markets Won't Unravel With India's Export Ban

At first glance, India's decision to ban all cotton exports looks like it could cause clothing retailers like Aeropostale (NYS: ARO) and Gap to come unraveled.

Last year, as all commodities were soaring out of hand, cotton in particular was hitting new highs, and clothing manufacturers watched as costs skipped beyond their ability to raise prices to match them. Aeropostale's shares lost two-thirds of their value from peak to trough, while Gap and American Eagle (NYS: AEO) plummeted as margins looked like they'd been eaten through by boll weevils.

Do as I say, not as I doSo when the world's second largest cotton exporter says it's going to stop exporting all cotton, it's natural to suspect prices will rise once again and the stocks of clothing retailers will fall. The International Cotton Association is predicting calamity once again, so the timing for retailers couldn't be any worse as they've only begun to regain their footing.

Although it hasn't returned to the highs it was trading at beforehand, Aeropostale has doubled from its low point, while Gap is up 63% and American Eagle has soared 50%. Even troubled luxury denim wear Joe's Jeans is rebounding.

Seeing costs grow at a time when global economies teeter on the edge of a new recession is not when you'd want to have to raise prices again. But I suspect things won't be as bad as last time, when cotton hit more than $2 a pound.

Lessons learnedFirst, the market is different today than it was in 2010, when India last banned cotton exports. Yes, they seem to do this every once in a while, but last time, it also came as China suffered reduced production due to droughts, and hoarding ensued to protect whatever supplies were available.

There's a larger supply of cotton today because India's first ban -- and the resulting price spike -- caused farmers globally to plant more cotton in the interim, meaning there could be a record harvest of 123 million bales globally, according to the USDA. Moreover, that global economic weakness alluded to earlier is dampening consumer demand, so even without India's contribution, price increases won't be nearly as significant as they otherwise might have been.

Last, not even India's sure it wants to ban cotton. Already, ministers in the government are calling for a review of the policy because it doesn't cooperate with the image India has been trying to cultivate of being a legitimate actor on the world stage.

From Tata Motors (NYS: TTM) , with its purchase of Jaguar and Land Rover from Ford in 2008, to Bharti Airtel's African telecom acquisition and Hindalco's purchase of aluminum producer Novelis, some of India's largest corporations have been making acquisitions that have raised the profile of the country as a valid power to be reckoned with, and a global ban on cotton exports runs counter to that image it's fought hard to create.

A surfeit of opportunityI think the only one damaged in this development is India, which comes off looking mercurial and manic, overreacting to situations with heavy-handed policy that it has to backtrack on quickly. Retailers look like they'll come out fine with minimum impact on their bottom line. If you considered shorting Aeropostale or True Religion Apparel (NAS: TRLG) on the basis of their newfound gains being reversed, I recommend keeping your fingers off the trigger.

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